The debate on the rate of profit Michel Husson, International ViewPoint n°426, July 2010 http://www.internationalviewpoint.org/spip.php?article1894 Michel Husson is an economist, in charge of employment at the Institut de recherches economiques et sociales (IRES) in Paris. He is member of the Fondation Copernic, a left-wing think tank, and of the Scientific Council of ATTAC. He has just published Un pur capitalisme, Lausanne 2008, Éditions Page Deux. You can consult his writings on http://hussonet.free.fr . A polemic on the rate of profit has developed over the last few months. This article seeks to review this debate which turns around four essential questions1. The four questions are: — an empirical question: what has been the evolution of the rate of profit since the early 1980s in the big capitalist countries? — a theoretical question: what is the status of the tendential fall in the rate of profit in the Marxist analysis? — a “semi-theoretical” question: what is the nature of the crisis? — a programmatic question: what is the impact of this discussion on the proposals advanced in the period opened by the crisis? The evolution of the rate of profit The entry point to the debate concerns whether the rate of profit has risen or not since the early 1980s, notably in the United States which most contributions focus on. Graphic 1 below summarises and updates the results of previous works2. Both in the USA and in the three main European countries, we can clearly distinguish two periods: a fall in the rate of profit until the early 1980s, then a rise. It can be noted that the fluctuations are most marked in the USA where the rate of profit falls from 2007 onwards, and this before the crisis moreover (Husson 2009b). But the tendency is certainly there. To this “bull” position is opposed a “bear” position (to employ the most neutral terms possible, here borrowing the language of the stock market) which disputes this schema and advances other evaluations of the rate of profit, which do not show an upward tendency since the early 1980s. The spectrum is moreover fairly broad, going from a smaller net increase in the tendential fall, via a flat encephalogram. The reasons for these differences3 concern the measurements of profit and capital used to calculate the rate of profit. So far as profit is concerned, two questions are raised: should we take into account, in the case of the USA, enterprises which do not have corporate status? And, more generally, should we take into account the profit of financial companies? 1 Being myself a participant in this debate - which justifies (for once) the use of the first person - I cannot pretend to a perfect impartiality. 2 The data base of the European Commission that I used previously contained errors which falsified the résults – above all before 1980 – and I have abandoned it in favour of national sources (see Husson 2010a) 3 For a more “technical” discussion see La hausse tendancielle du taux de profit (Husson 2010a) 1 Graphic 1 The rate of profit in the United States and in Europe 30 28 26 United States 24 22 20 18 16 14 Germany+France+United Kingdom 12 10 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 In the USA, the statistics of the BEA (Bureau of Economic Analysis) distinguish profits (corporate profits) calculated for companies (domestic corporate business) and incomes from ownership (proprietors’ income). The latter concern enterprises which have a status other than that of company (corporate): partnerships, sole proprietorships and tax-exempt cooperatives). In incorporating them, we find the concept of net operating surplus for the whole of the private sector and that is why I have employed this enlarged definition of profit. However, this choice modifies the level of the rate of profit but leaves its evolution practically unchanged. On the other hand, the evolution of the rate of profit is not the same according to whether or not one takes into account the profits of financial companies (banks, insurance and so on). If we exclude these from the definition of profit, the rate of profit (still in the USA) tends to stay flat. This can be understood: the share of profit taken by the financial companies represents a growing fraction of the profits realised by the private sector as a whole. The argument invoked is that these amount to virtual profits which correspond to the valorisation of fictitious capital. But it seems to me that there is here a confusion between company accounting and national accounting; for the latter, the profit of financial companies is defined more or less as the difference between interest received and interest paid. This flow measures the capacity of the banks and insurance companies to capture a part of the value created every year. As to the valorisation of assets, it appears elsewhere in the balance sheets ; the same goes moreover for the non financial companies and for households whose income does not incorporate the valorisation of their assets (shares, houses and so on) which is recorded in another account, that of their “wealth”4. The value added of financial companies (and thus their profits) is a component of GDP of which the real counterparts are consumption, investment and the trade balance. Not considering the profits of the financial sector as real flows would lead to breaking accounting equality between the two “optics” of measurement of GDP. Then there are the problems of measurement of capital. Some value it in “gross” rather than “net” terms, in other words not taking account of depreciation, or in Marxist terms, of the transmission of the value of fixed capital to commodities. But the main controversy concerns the mode of valorisation of capital: either at current prices – as done by most contributions – or at historic cost which is, according to Andrew Kliman (2009b), the only correct method. I have discussed this position in a text called Les coûts historiques 4 In the USA, these data are produced by the Flow of Funds Accounts of the Federal Reserve Bank 2 d’Andrew Kliman, republished in part in La hausse tendancielle. The response by Kliman (Masters of words, 2010) does not seem to me to change the terms of the debate on this point nor to fundamentally challenge the arguments I have advanced. In truth, this choice (historic cost or current prices) does not have enormous empirical implications. The true difference resides in the corrections subsequently made by Kliman to measure the rate of profit in value which lead to tendentially falling rates of profit over the last 50 years (Husson 2009c). Two readings of the neoliberal period This note of reestablishment of the rate of profit takes place within a reading of the period which emphasises several “stylised facts”. This is a term we owe to the economist Nicholas Kaldor (1961) who explains his method thus: facts as recorded by statisticians, are always subject to numerous snags and qualifications, and for that reason are incapable of being summarized” and hence theorists “should be free to start off with a stylised view of the facts – i.e. concentrate on broad tendencies, ignoring individual detail” (Nicholas Kaldor (1961), ’Capital Accumulation and Economic Growth.’ In: Lutz/Hague (eds.): The Theory of Capital, London, pp. 177-222). Among the stylised facts identified by Kaldor, we already find the stability of the rate of profit, the capital-output ration and the share of labour in total income. This method is still valid today and it is possible to identify four stylised facts which characterise capitalism in its neoliberal phase: 1. a fall in the share of labour 2. an increased rate of profit 3. stagnation of the rate of accumulation 4. an increase in the share of dividends One of the characteristics of capitalism (seen through “bull” spectacles) is that the rate of profit increases but does not lead to an increased rate of accumulation. This is not to say that the rate of accumulation falls, but that it does not increase as much as the rate of profit. In the “bear” version this scissor effect between profit and accumulation obviously doesn’t exist: the rate of profit stagnates, the rate of accumulation also, so they are in synch. A supplementary argument is however advanced by Louis Gill, here following a suggestion by François Chesnais: what if the investment was realised elsewhere than in the imperialist metropolises? Domestic investment would be relatively stagnant but would be broadly compensated by investment abroad, particularly in the emergent countries. This objection raises a more general problem. Capitalist globalisation tends to dissolve the economic significance of national frontiers: the map of the multinationals corresponds increasingly less to that of countries. To take only one example, the US trade deficit is linked to a great extent to imports from emergent countries like China, but which also correspond to investment and transfers of production by US companies. The usual accounting tools are increasingly less appropriate to this globalised world. That said, the more rapid growth of international investment is not a sufficient objection. Although it reduces the “scissors” between profit and accumulation, it would be necessary to show that its profitability is lower than that of domestic investment, which is highly improbable. A supplementary difficulty is that the data on international investment have difficulty in distinguishing “real” investment as in financial investment from movements inside groups. A recent study shows that in the case of France, a stricter definition of investment flows leads to a perceptible decrease in their size: in 2008, French investment abroad would be more than 80 billion euros against 137 with the traditional method of calculation.